September 6th something dramatic happened that mostly went un-noticed. The events will affect the world economy for a long time, and yet almost nobody paid heed or made any comments.
And of course it had to do with China
Besides having military bases around the entire planet, what really makes the United States the only superpower in the world is that the U.S. dollar is the international reserve currency. Everybody must trade in dollars. This also gives the Federal Reserve a truly unique opportunity to manipulate U.S. and international economy by printing money. Today they don’t actually start the printing press, but add credit to the financial system through so-called quantitative easing. In the latest round of such measures has the president of The Fed, Ben Bernanke, stated that he will do this forever, if necessary.
All excuses aside, this is a devaluation of the dollar. In principle this may be okay for the U.S., as long as the rest of the world must trade in dollars and accept that a dollar is a dollar. But in reality it is a hidden currency war, which the Brazilian Minister of Finance Guido Mantega pointed out in 2010.
China is America’s largest international creditor and has a huge trade surplus with the U.S., which in 2012 probably will reach 300 billion dollars. That means that China piles up dollars and U.S. government bonds denominated in U.S. dollars. Devaluation of the dollar reduces the value of these assets. At the same time China’s destiny is tied to the U.S. If China «pulls the plug» in the U.S. dollar bubble, China’s values will go down the drain.
China intends to do something about this. A senior official of the Chinese central bank said 29 June 2012 that the Chinese currency yuan «has the potential of becoming an international reserve currency.»
In recent months, a number of central banks, including Japan, South Korea, Nigeria and Saudi Arabia announced that they would buy up the renminbi, and thereby weaken the role of the dollar.
In July 2012 bought the Hong Kong Stock Exchange (Hong Kong Exchanges & Clearing Ltd.) London Metal Exchange (LME). LME trades with 80% of the contracts in the basic metals. This exchange will also trade in renminbi.
So what really happened September 6th 2012?
That day the Chinese government declared that from now on all their banking systems and trading systems were ready to make all Chinese oil trade in renminbi and not in dollars.
The day after Russian authorities declared that from now on they will sell as much oil China may need and that they would make the contracts in renminbi and not in dollars.
Crude oil is not any commodity. Crude oil is The Commodity in world trade. This market has been dominated by the dollar. Now China challenges the U.S. in this key market. And there is absolutely nothing the United States can do about it.
In this light, the quantitative easing of Ben Bernanke may turn out to be the highroad for the United States to end up as a weimar republic, where the currency becomes worthless and the debt becomes impossible to pay.
Will China surpass the U.S. in 2016?
In its latest report on the world economy’s future OECD writes that China probably will overtake the U.S. already by 2016.
In my book The Collapse (2011) I held that this probably would happen before 2020. But the economic crisis has been so great and stagnation in the U.S. economy so great that now it seems to happen about four years earlier. However I owe my readers to point out that the Chinese economy is in big trouble. China has the world’s largest real estate bubble and a huge financial bubble, and industrial production has shown clear signs of stagnation. See my blog China – a colossus with feet of clay (so far only in Norwegian). See also the well-informed articles of Michael Pettis.
Changes on tectonic scale
But regardless of China’s inherent weaknesses, what is happening is so gigantic that it will shift power relations in the world, control over the economy, commodities and currencies in ways that we may have difficulty imagining.
A Chinese would put it this way: “Over the past 20 centuries, China has been the world’s largest economy in 18 of them. We’ve had some weaknesses over the past two centuries, but now we are headed back on track.”
In the ongoing currency war both China and the U.S. contribute to keep the euro artificially high. This enhances the already very serious crisis in Europe, but there is not much EU can do about it.
The currency war will continue, and in the game that comes is not the newly elected President Obama who has the best cards.
Too big to fail?
Some people object, saying that the U.S. government borrows more from itself than from abroad, so there is no real debt problem. It is true that the so-called intragovernmental debt is 4.81 trillion dollars of total debt of 15.86 trillion (June 2012, has now passed the debt 16 trillion). But that does not mean that it can easily be ignored. The U.S.government borrows heavily from among others the Social Security Trust Fund. These are very real welfare obligations that the U.S. Government owes the people. So at present there is no financial coverage for these. If there is no basic improvement of the U.S. real economy, it is going towards a social crash landing in the not too distant future.
But let us for a moment ignore this powder keg and watch the rest of the debt. It looks like this:
Debt to China was at its largest in summer 2011. Since then, China has sold off nicely and slowly, which completes the image of China’s strategy. China spends its dollar reserves by buying real wealth in the form of companies, mines, land etc abroad, included in the United States itself.
China is also using its dollars to buy gold big time with the explicit ambition to make the renminbi a reserve currency.
If world markets lose confidence in the dollar and begin to trade in the renminbi and other currencies, the value of the dollar will be falling like a rock, and the U.S. will be struggling to pay for their imports.
Debt to China is 10.5% of the U.S. debt outside of the internal government debt. Pooh-pooh, some say, that’s not so big. What they ignore is that America’s finances is a Ponzi scheme, and it will collapse like a house of cards once the trust implodes. There is no great consolation that Japan is the second largest creditor. Japan is bust. The economy is stalling; the debt is soaring, the energy bill is skyrocketing and Japanese companies lose in most markets.
Make a try: build a house of cards of 52 cards. Then take out one of the cards at the bottom. It would not mean so much, after all it is only 2% of the entire deck …